By Ajay Shah, on November 3rd, 2011
For once, I am pleased at how India played it: India gave Pakistan MFN status way back, in 1996, without getting into the silliness of reciprocity. A hallmark of professional competence in international trade is the idea of unilateral liberalisation: Even if another country is silly enough to have barriers against us, we should not have trade barriers against them. Removing barriers against India’s globalisation is a favour to us, regardless of what it does to anyone else. India often gets into cul de sacs by obsessing on reciprocity – e.g. we won’t open up to imports of agricultural products because the Europeans won’t. We won’t allow foreign banks to operate in India because some other countries have barriers against the operations of Indian banks. And so on. But for once, in this case, our guys seem to have played it right (and way back in 1996, too!).
And now, we have a nice next step: Pakistan will give India MFN status. What might happen next? Here are some conjectures:
- At present, there is significant Indo-Pak trade; it merely gets routed through Dubai. Once Pakistan gives India MFN status, the entrepot trade that was going Bombay -> Dubai -> Karachi will go Bombay -> Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India’s exports to UAE and a fairly sharp rise in India’s exports to Pakistan.
- There will be a boom in shipping, communication and trade serving the direct Bombay -> Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.
- At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. Another dimension of cost is the cost of the middleman in Dubai. The establishment cost of this middleman in Dubai would be eliminated.
- Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labour and capital that’s freed up by firms that die owing to import competition, and because of improved competitiveness that comes from cheaper raw materials. Exports from Pakistan to India will go up significantly.
- Large Indian and Pakistani corporations will look much more seriously at the opportunities that lie just beyond the national border. Over time, human capacities and human networks will build up on both sides, supporting cross-border operations. This will take time to ripen, but when it does, the effects will be large. A huge fraction of global trade is intra-firm trade, so it’s very important to have large firms of both countries having operations in both countries, in order to get growth of trade.
- The biggest gains in India will be in Gujarat, given the myriad ports in Gujarat which are a short distance away from Pakistan. But in the future, if road and rail links open up, then there are big opportunities in Punjab also. Wouldn’t it be nice to have a NHAI style road running from Ahmedabad to Karachi, and from Amritsar to Lahore?
To the extent that we’re merely rerouting trade, bypassing Dubai, this will impose no new stress on ports and airports in Pakistan. But to the extent that new trade is created – as I expect it will (and as argued above) – then new work will be required in Pakistan on enhancing the capacity of ports and airports. I would personally be surprised if the effects are not large.
In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India’s connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.
Consider a product like cement, which is ordinarily considered a non-tradeable. Transportation of cement is so hard, there isn’t a unified national market in India. There are a series of regional markets. But even in this, modifications of transportation have mattered greatly. E.g. when Gujarat Ambuja came up with the innovation (back in the mid 1990s) of sending cement from Saurashtra to Bombay, by sea, this was a very big deal. By that same logic, cement from the coast of Saurashtra can go to Pakistan (or vice versa, depending on who produces at a lower price). We should not see trade in goods in isolation. All dimensions of globalisation are intimately connected to each other. To do more trade in goods and services, we need more movement of people. Ergo, the silly visa restrictions that both countries impose on each other need to be eased. Finance follows trade: So where trade in goods and services leads the way, bigger financial integration will inevitably follow with trade financing, cross-border banking, payments, purchases of information, operations of multinationals and FDI, INR/PKR currency risk management, and investment flows. More will need to be done on investment guarantees, export/import trade financing, etc.
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By Ethan Zuckerman, on October 25th, 2010
Six years ago, early in my tenure at Berkman, I wrote a blog post that tried to calculate the cost of shipping water from a bottling plant in Yaqara, Fiji to Cambridge, Massachusetts. I was interested in unpacking the everyday mystery of container shipping – how is it possible that we can sell a product for a couple of dollars a bottle despite shipping it 8,000 miles around the world – and in the odd idea that atoms might be more mobile than bits, as we get lots more Fiji water in the US than Fijian music, movies or news.
My estimate then was that a 40′ container filled with Fiji water would cost roughly $5000 to deliver from Suva, Fiji to Cambridge – I came up with the estimate based on a variety of statistics about international shipping that I bent and welded into a Fiji/Massachusetts estimate. At $5000 a container and 24,000 kilograms per 40′ box, it would cost $0.21 for a liter bottle of Fiji water to make the 8,000 mile journey. Not free, but a small fraction of the retail price of a bottle of “premium” imported bottled water.
I had occasion to return to this blogpost today – I’m working on a book, and this Fiji example features in it. So I decided to recalcuate the numbers and see if I could find an answer that’s more defensible and satisfying.
Turns out I got a few details wrong. First, the 24,000kg figure applies to smaller, 20′ containers – the limit for 40-footers is 30,480kg. And the price from Suva to Cambridge for a 40′ container is just slightly higher – $5,540.30. That comes out to $0.18 per liter, three cents less than I calculated six years ago.
These new figures come from my new favorite toy, Maersk’s online shipping rates calculator. The Danish superfirm A.P. Møller – Mærsk Gruppen is the largest shipping group in the world, with offices in 135 countries, 120,000 employees, and roughly 600 container ships, capable of carrying more than 2 million 20′ containers at any given time. They’ve also got a thoroughly badass IT system, which they’ve now made accessible to the general public.
Okay, it’s not exactly Amazon.com, or even Fedex. To use Maersk’s calculator, you need to register with the site, download a client browser certificate and accept three server certificates from Maersk before you can access their secure site. But once you do, it’s just a few short clicks before you can calculate the cost of shipping a 20′ container of “umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof” (yes, that’s one of the available categories, along with “bone and meal”, “ores, slag and ash” and “straw, esparto, other plaiting materials and articles of straw, esparto, other plaiting materials) from Auckland to Dubai: $2451.02
The main thing I’ve found playing with Maersk’s calendar: distance doesn’t matter as much as demand. Americans buy a lot of atoms from China. The Chinese don’t buy nearly as many from the US. A 40′ container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space.
(The 2006 New York Times article that offers that 60% empty container statistic suggests that lots of full containers are coming to China from raw-materials rich countries like Australia, Brazil and the Middle East. That suggests we should see the opposite pattern – expensive containers from Sao Paolo to Shanghai and cheap ones in the other direction. Nope. $5101.70 from Shanghai to Sao Paolo, $1930.59 in the other direction. Perhaps containers from China to Brazil are riding the same ships as those to the US and paying the same premiums?)
 
Maersk also offers a set of maps that help you get a sense for how these trade routes actually work. It’s a four day trip from Suva to Auckland on the Pacific Islands Express, and then the bottles of Fiji water are transfered to OC1, the Oceania Americas Service. The Pacific crossing is a long one – 18 days to the Panama Canal, a quick stop in Cartagena, and we’re in Philadephia 25 days out of Auckland. It’s a truck ride from Philly to Cambridge, and that short hop is responsible for $950 of the total transit cost.
As I poke through these maps, schedules and tariffs, I feel like I’m glimpsing a secret world. Part of it may come from the sheer poetry of the names. Shipping routes include “The Boomerang” and the “The South China/Australia Yo-yo” and connect ports like Tin Can Island (Apapa, Nigeria, the main port for Lagos). And part comes from the sense that these routes and rates, the infrastructure that supports an economy where transPacific bottled water is possible, are the ley lines of globalization, radiating a mysterious and sinister power.
By Eldon Mast, on December 18th, 2009
FedEx reported Thursday that it shipped 1,000,000 more packages than expected on Monday — which it anticipates will be its peak shipping day this holiday. The firm reported that this year’s busiest day is up 17% from its busiest day last year.
FedEx CEO, Fred Smith further observed that their business has now observed a significant “turning point,” and that the company will resume some normal human resources benefits that it had suspended for employees in 2009.
 “Global economic conditions are improving,” Smith said in an investor conference call Thursday. Executives went on to cite their outlook for “modestly improving economic conditions.” Because of those improvements, FedEx said it will restart merit salary increases and resume its retirement-plan matches for those employees who participate in their 401(k) program. Both policies had been put on hold.FedEx is among a growing list of companies that are lifting freezes on raises and expense control measures that were imposed during the recession. According to a survey by Watson Wyatt — a benefits and human-resources consulting firm — about half of all large U.S. companies that froze salaries for 2009 plan to unfreeze them for 2010, and over a third of companies that reduced 401(k) matching contributions plan to restore them in 2010.
FedEx’s comments further confirm “very good signs ” for retailers this holiday season and their results will be far from lackluster as many economic pundits had widely predicted earlier this year.
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By Eldon Mast, on May 29th, 2009
Strong demand for communications equipment, machinery and fabricated metal led an upbeat durable goods report for April. Overall orders jumped by 1.9%.
Most analysts were wrong and had expected only a rise of 0.4%.
The bounce in new orders was broad but was led by communication equipment which alone was up 6.9 percent. Significant new orders were also seen for fabricated metals, machinery, primary metals, and electrical equipment. The monthly upward momentum was the best since December 2007.
The report also comes at a time when the cost of shipping raw materials has now jumped almost vertically. The Baltic Dry Index is up 377% from its December low.
Additional good news on the employment front posted on Thursday. New claims for unemployment continue to fall as does the 4 week moving average. The new data further solidifies Bob Gordon’s assertion that the latest (and several weeks past) peak in claims will be the clear marker for this recession’s end.
By Trace Mayer, on April 13th, 2009
Technology keeps thrusting forward at an ever increasing rate as the Information Age transforms the world at a rapid pace. Business is happening at the speed of thought as companies are beginning to morph into digital entities in a physical world. Fortunes have already been made in supply chain management and product distribution as evidenced with Toyota and WalMart. With top lines under constant pressure as the credit contraction grinds on increased efficiency is being eked out of every possible source.
Man’s financial progress is a function of effort times tools. Business has, is and will be the primary tool to generate wealth. The ‘job’, a relic of the Industrial Age, is rapidly being replaced with outsourced freelancers. Millions of Americans have lost their jobs in recent months.
This vast pool of usually skilled workers are now navigating a brave new world. While hundreds apply for a single job; an exponentially expanding web invites the adventurous and rewards the productive. Never in the history of the world has there been such powerful Internet marketing tools available to the lone entrepreneur to leverage their productivity.
THE OLD ORDER
Creative destruction is taking place in almost every aspect of the the economy from the exciting realm of newspapers and journalism to the mundane of postal and package delivery. The United States Postal Service enjoys a substantial monopoly imposed by Federal law. Predictably this system has catered to special interests with their army of lobbyists. That is the reason most receive tons of dirty and annoying advertising SPAM in the mailboxes that waste their time and like most governmental policies harm the environment.
Bloomberg reports that “The U.S. Postal Service said it will offer early retirement to about 150,000 workers … In the past year the service has taken ‘very aggressive cost-cutting actions,’ including a nationwide hiring freeze and halting construction of new postal facilities, according to the statement. Potter [Postmaster General] asked Congress in January to let the Postal Service reduce its six-days-a-week delivery schedule by one day to save money.”
Why does postal mail, the vast majority of it SPAM, need to be physically delivered even once a week? Why does an address in north Alaska cost the same to deliver to as one in Los Angeles? Legislative interferences in the marketplace to prop up failing institutions lead to expensive moral hazard, inefficient systems, poor customer service and a lower quality of product. Is the use of violence to perpetuate this failing system moral?
THE NEW ORDER
With the advent of the Internet the delivery of postal mail and packages can be accomplished with greater efficiency. Through innovative Internet-powered CMRAs (Commercial Mail Receiving Agency), customers can view images of their envelopes in email or online and have their mail securely scanned into a PDF, recycled, shredded, or forwarded. For the privacy minded, like victims of spousal abuse, etc. the ability to vanish using this type of ghost address is extremely valuable.
As the Center on Budget and Policy Priorities reports, “States are facing a great fiscal crisis. At least 47 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.”
Many individuals have their own budget with policy priorities and given all the Tea Parties, I highly doubt it involves paying more taxes than legally required. For example, customers can easily have the ability to receive packages in states like Oregon where there is no sales tax, forward the package using Fedex or the United Postal Service (UPS), and the savings would likely be greater than the cost of an entire year of the service. This may slightly perturb some States, which are breaking into safety deposit boxes and auctioning the contents on Ebay, resulting in greater enforcement of sales and use tax laws but that will likely be very difficult.
Ebay and Amazon are simply digital flea markets and the digital nomad can finish all their work at a Fedex Office. The Internet entrepreneur relies on package tracking to ensure their products and sold on the digital flea markets are delivered. And so it happens that business goes offline to online and online to offline.
DIGITAL BEHEMOTHS
Most people think of Ebay, Amazon and Google as the digital behemoths. But Fedex CEO Frederick Smith understood the future with his long-held mantra that “The information about a package is as important as the package itself.” Fedex and UPS are as much information management companies as they are shipping companies. They have large, deep and formidable moats that will prevent competitors from siphoning market share.
Their charts are likewise similar:
 While Fedex has recently laid off 1,000 of its 223,400 employees both it and UPS, which is expanding door-to-door service in Mexico, will be around generating profits for a long time. But the current administration is exacerbating the greater depression which will drag down their earnings. So when will UPS and Fedex shares be a good value? Gold is the most reliable instrument for calculating value and is being re-enthroned as a currency in ordinary daily transactions.
| gg = gold gram |
FEDEX |
UPS |
| Share Price |
$51 or 1.786gg |
$53.50 or 1.852gg |
| Market Capitalization |
$16B |
$53B |
| EPS |
$2.35 |
$2.94 |
| Target Price |
1.100gg |
1.250gg |
CONCLUSION
 Creative destruction is taking place at a rapid pace during the Information Age. Many Internet marketing tools are available for the entrepreneur. Services like Earth Class Mail, which exist through voluntary relationships, will rise. The old State sponsored monopolies enforced through violence will fall. Fedex and UPS are digital behemoths which will play a critical role in the new online to offline and offline to online economy.
As the great credit contraction continues the top lines of firms will be under extreme pressure and will most likely affect Fedex and UPS while the FRN$ will continue its wild fluctuations in purchasing power. Therefore, while Fedex and UPS are solid companies with a bright future they should get materially cheaper, at 1.1gg and 1.25gg per share respectively, before they become a good value. They will most likely be back there again.
Disclosures: Long physical gold and silver with no position in UPS, FDX, or the other firms mentioned.
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